Buy Shree Cement; hold ACC, Ambuja: Antique Broking

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Buy Shree Cement; hold ACC, Ambuja: Antique Broking

Nirav Shah, manager research of Antique Broking says ACC, Ambuja and Ultratech are nearing his price targets. “ACC, we had a price target of Rs 1,122. So, we have a hold on that. Ambuja, we have a price target of Rs 146, again a hold on that. We have a buy on the Shree Cement with a target of Rs 2,275,” he adds.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets ACC BSE | NSE 31/05/12 Are Mutual Funds betting on ACC? Other Stocks in this news Ambuja Cements | UltraTech Cement | Shree Cements |

Things have not been good for the cement sector over the last one week because of concerns like price cuts and coal price increases.  

In an interview to CNBC-TV18, Nirav Shah, manager research of Antique Broking says, last week, there was a price cut by the major players in Himachal Pradesh to the extent of Rs 25 per bag. "I think a lot of that is attributed to a lower demand. If the demand really picks up then I don't see any further cuts from these levels," he adds.

According to him, there will be some pressure on the margins or EBITDA per tonne because of the recent coal price increase.

He further says, ACC , Ambuja and Ultratech are nearing his price targets. "ACC, we had a price target of Rs 1,122. So, we have a hold on that. Ambuja, we have a price target of Rs 146, again a hold on that. Ultratech, we have a target of Rs 1,206. We have a buy on the Shree Cement with a target of Rs 2,275," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: What are your thoughts on these price cuts in Himachal Pradesh? How much more do you see prices softening there?

A: Last week, there was a price cut by the major players in Himachal Pradesh to the extent of Rs 25 per bag. But I think a lot of that is also attributed to a lower demand. So, if the demand really picks up then I don't see any further cuts from these levels, partially because companies are also witnessing significant cost increases. So, price cuts seem difficult, if the demand recovers. The question is whether the demand recovers or not. If it recovers then I don't see any further price cuts in Himachal or any other regions.

Q: What kind of demand trends are you spotting? A lot of your peers seem to be quite pessimistic about demand trends for most geographies in India.

A: If you look at the cement demand, especially in the April to October period, our year-to-date growth was around 2.8%. In November and December, we have witnessed a double digit growth rate. In November, the growth rate was 20%. In December, based on the preliminary data, we should be ending the month somewhere around 12%. So that takes the year-to-date growth to around 5.5%, partially attributed to a lower base of last year.

If the demand recovers from these levels, it is good for the industry that the pricing power will be slowly coming back to the industry. If you look at the December utilisation levels, that should be somewhere around 78-80%. So, once it crosses 83-85% then cement companies will be easily able to pass on any cost increases they will witness. But the question is in the next three-four quarters till they reach 83-85% whether they will be able to pass it or not.

Q: We have been speaking to cement companies who have been talking about coal prices getting higher and then margins getting affected? Over the next three quarters, do you see margins are under pressure?

A: Yes. There will be some pressure on the margins or EBITDA per tonne because of the recent coal price increase, CIL changing its pricing mechanism to GCB base from earlier Heat Value base. There will be an impact of around Rs 8-10 per bag; even if these companies are able to pass on gradually over the next three-four months. But in the interim, they will be impacted.

I do see some pressure on the EBITDA per tonne. Other than that, even in Maharashtra, there was a duty on captive power generated, so again pressure to the extent of Rs 3.5-4 per bag for players in Maharashtra. So, there are some concerns on the costing front which are consistently increasing for these sectors. I will not rule out the possibility of margins being under pressure in the near-term.

Q: From your coverage universe, which stocks do you think are most vulnerable to tepid demand and weak pricing power over the next two to three quarters?

A: On the costing front, ACC's linkage ratio is very high. On the coal front, it will be impacted. The impact is in the region of Rs 8-10 per bag because of the increase in coal prices.

From the point of view of prices being increased by Coal India, ACC will be the most impacted. I think Shree Cement will be the least impacted because it does not rely on any coal linkages.

Q: Which are your buys and sells from the cement sector now?

A: We were fairly positive on this sector. I think ACC, Ambuja and Ultratech are nearing our price targets. ACC, we had a price target of Rs 1,122. So, we have a hold on that.

Ambuja, we have a price target of Rs 146, again a hold on that. Ultratech, we have a target of Rs 1,206. We have a buy on the Shree Cement with a target of Rs 2,275.